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Money!!!!

Money!!!!. Money Defined. Money is anything that can be used as: A medium of exchange A store of value A unit of account / Standard of Value Money works best when it meets these criteria: Portable Durable Divisible Acceptable Stable. Money Facts:.

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Money!!!!

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  1. Money!!!!

  2. Money Defined • Money is anything that can be used as: • A medium of exchange • A store of value • A unit of account / Standard of Value • Money works best when it meets these criteria: • Portable • Durable • Divisible • Acceptable • Stable

  3. Money Facts: • What backs the dollar and makes it valuable? • Gold? • NO! The dollar is legal tender because the government says it’s money and people willingly accept it. The Dollar is backed by FAITH. • This is referred to as an inconvertible fiat standard.

  4. The Supply of Money • In the United States, the Federal Reserve System is the sole issuer of currency. • This means the Fed has monopoly control over the money supply. • There are two important measures of the Money Supply today. • M1 • M2

  5. M1 • M1 serves primarily as a medium of exchange. It includes: • Currency and Coin • Demand Deposits

  6. M2 • M2 serves as a store of value. It includes: • The M1 • Time Deposits • Money Market Mutual Funds • Overnight Eurodollars Certificates of Deposit Savings Accounts

  7. M1 & M2 • As we go from M1 to M2 • The measure becomeslarger • Money becomes less liquid • As we go from M2 to M1 • Themeasurebecomes smaller • Money becomesmoreliquid

  8. Relating Money to GDP • Economist, Irving Fisher postulated that : Nominal GDP = The Money Supply * Money’s Velocity

  9. The Monetary Equation of Exchange • MV = PQ • M = money supply (M1 or M2) • V = money’s velocity (M1 or M2) • P = price level (PL on the AS/AD diagram) • Q = real GDP ( sometimes labeled Y on the AS/AD diagram) • P*Q or PQ = Nominal GDP

  10. The Monetary Equation of Exchange • MV=PQ • M1=$2 trillion • V of M1 = 7 • PQ = $14 trillion LRAS SRAS PL P AD QF GDPR

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